Knowledge and innovation are important contributors to a nation's progress. For example, the development of new technologies and the application of technologies developed in other countries can improve Australia's productivity and raise national income.

No single indicator encapsulates all aspects of knowledge and innovation (see box below). This commentary focuses on three aspects for which data are available: some of Australia's investments in knowledge (namely expenditure on research and development, education and computer software); businesses' use of the Internet; and the number of knowledge-based workers.

Between 1990-91 and 2000-01, expenditure on education, research and development and computer software all rose, as did the proportion of the workforce in knowledge-related occupations. And since the late 1990s, the number of businesses using the Internet has grown very rapidly.

Worldwide during recent decades, new goods and services have emerged that account for rapidly growing shares of total expenditure. New production processes and whole new industries have emerged. Australia's capacity to take advantage of these changes depends on many factors, such as the existence of individuals, firms and institutions that can develop or apply new technologies, especially for the acquisition and sharing of information. There is evidence to suggest that the differences between countries' growth rates can be attributed in part to differences in their investments in information and communications technology and improvements in the quality of labour.(SEE FOOTNOTE 1)

RESEARCH AND DEVELOPMENT

Research and development (R&D) can be viewed in many ways. One international standard definition is:

"systematic investigation or experimentation involving innovation or technical risk, the outcome of which is new knowledge, with or without specific practical application, or new or improved products, processes, materials, devices or services."(SEE FOOTNOTE 2)

R&D encompasses both basic research (undertaken primarily to acquire new knowledge without a specific or immediate application in view) and applied research. The proportion of Australia's GDP devoted to R&D expenditure rose during the early part of the 1990s, and peaked in 1996-97 at 1.65%. However, by 1998-99 it had fallen back to 1.5%.

The proportion of Australian GDP devoted to R&D expenditure is relatively low by international standards. In 1998-99, Australia ranked twelfth among OECD countries; for example, the corresponding proportion for Japan was 3.1%, for the USA 2.7%, for Germany 2.3% and for Canada 1.6%. But Australia also imports technology and processes embodying R&D from other countries.

Research and development expenditure, proportion of GDP - selected years

The sources of funds for expenditure on R&D have changed appreciably during recent years. In 1988-89 governments funded 64% of the total, but by 1998-99 this proportion had fallen to 48%; during the same ten years, the proportion funded by business rose from 33% to 45%.

EXPENDITURE ON EDUCATION

Education and training are important means by which Australians can participate more fully in economic and social life. A major source of growth in Australia's output and income has been improvement in human capital (the skills embodied in the Australian labour force). A more highly educated workforce is better able to develop or adopt technologies and organisational practices that enhance productivity. Skills enhancement can occur in a range of places (from formal educational institutions to on-the-job training and self instruction). Formal education remains a major contributor.

Expenditure on education(a), proportion of GDP

Educational institutions such as universities and schools both create and disseminate knowledge and innovation. During the past decade, education expenditure has been fairly steady as a proportion of GDP (between 5% and 5.5%). Government expenditure is by far the larger component (3.7% of GDP in 2000-01, compared to 1.5% accounted for by private expenditure).(SEE FOOTNOTE 3)

There is no single measure that encapsulates all the elements of knowledge and innovation. An array of measures is needed. Aspects relevant to Australia's progress include the following.

The economic resources and the number of people devoted to the creation and application of knowledge. Indicators include the proportion of GDP devoted to research and development and the proportion of the workforce employed in knowledge-based fields.

The economic resources devoted to education, an indicator of which is the ratio of consumption and investment spending on education to GDP.

The rate at which current developments in information and knowledge are taken up. Among the most prominent of such developments in recent years are information technology and the Internet. Indicators include the ratio of investment in software to GDP and the proportion of businesses which have their own Web site or home page.

INVESTMENT IN COMPUTER SOFTWARE

In recent years, information technology has become progressively more important to the Australian economy, as it has in most other countries. Innovations in this field are embodied in both hardware and software. Australian investment expenditure on software is one indicator of the rate at which the new technology is being taken up.

During the 1990s, Australian investment on software as a proportion of GDP has risen rapidly (from 1% in 1990-91 to 1.8% in 2000-01) despite falling software prices.(SEE FOOTNOTE 3)

Investment in software, proportion of GDP

Managers and professionals(a), proportion of total employment(b)

KNOWLEDGE-BASED WORKERS

The proportion of knowledge-based workers in a country gives some indication of how intensively knowledge is used in its economy.

There are many ways of characterising the people engaged in knowledge-related occupations. One definition includes those employed as:

managers and administrators; and

professionals and associate professionals - including those in science and engineering, business and information, health and education.

The proportion of workers engaged in knowledge-related occupations in Australia increased markedly during the past decade, rising from a little under 31% of employees in August 1991 to 38% in August 2001. The number of professionals and associate professionals grew particularly strongly (up 83% in the ten years to August 2001, whereas total employment rose by just 19%).(SEE FOOTNOTE 4)

BUSINESS TAKE-UP OF THE INTERNET

One of the most recent waves of innovation in Australia and other countries is use of the Internet by businesses. More and more firms are using the Internet for business transactions (say, for receiving customer orders). In some industries (such as news and entertainment), services can be delivered to customers through the Internet. Other businesses use the Internet to provide customers with information about the goods and services available.

Recent years have seen a rapid take-up of the Internet by Australian businesses. In 1997-98, 6% of business had a Web site or home page; by 1999-2000, this proportion had risen to 16%.(SEE FOOTNOTE 5)

Proportion of businesses with Website or Homepage - 1997-98 and 1999-2000

1997-98

1999-2000

No. of employees

%

%

1-4

4

9

5-19

8

24

20-99

21

46

100 or more

58

68

All businesses

6

16

Source: Business Use of Information Technology, 1997-98 and 1999-2000, Cat. no. 8129.0.

LINKS TO OTHER DIMENSIONS OF PROGRESS

Knowledge and innovation can contribute to Australia's productivity growth (and hence to improvements in national income and competitiveness) because they enhance the prospects of technological advances and of improvements to work practices and other aspects of economic production.

Knowledge and innovation can also result in improved approaches to satisfying the needs of Australians (say, through better health services) and to protecting Australia's environmental resources.

Education both disseminates existing knowledge among the Australian population and enhances the probability that Australians will generate or adopt new technologies and other innovations.

1 Organisation for Economic Cooperation and Development, 2000, A New Economy? The Changing Role of Innovation and Information Technology in Growth, OECD, 2000.

2 Unless otherwise indicated, all data in this segment of the commentary are from Australian Bureau of Statistics, various issues, Research and Experimental Development, All Sector Summary, Cat. no. 8112.0, ABS, Canberra.

3 Unless otherwise indicated, all data in this segment of the commentary are from Australian Bureau of Statistics 2001, Australian System of National Accounts 2000-01, Cat. no. 5204.0, ABS, Canberra.

4 Unless otherwise indicated, all data in this segment of the commentary are from Australian Bureau of Statistics, various issues, Labour Force, Australia, Cat. no. 6202.0, ABS, Canberra.

5 Australian Bureau of Statistics 1999 and 2001, Business Use of Information Technology, Cat. no. 8129.0, ABS, Canberra.

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